<PAGE>

================================================================================
 
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                 FORM 10-Q/A*

         [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended June 30, 1996

                                      OR

         [_] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number 1-19571

                                 GRANCARE, INC.
             (Exact name of registrant as specified in its charter)

              California                               95-4299210
       (State or other jurisdiction                  (I.R.S.Employer 
        of incorporation or organization)          Identification No.)

        One Ravinia Drive, Suite 1500
              Atlanta, Georgia                                30346
   (Address of principal executive offices)                 (Zip Code)

                                (770) 393-0199
             (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                            Yes     X       No 
                                ---------      ----------    

There were __________ shares outstanding of registrant's Common Stock, no par
value, as of December __, 1996.

--------------------------------------------------------------------------------

================================================================================
*The purpose of this amendment is to provide enhanced disclosure regarding the 
 reasons underlying changes to the net revenue and operating expense figures 
 for the periods compared in the Results of Operations section of the 
 Management's Discussion and Analysis included herein.

                                    Page 1
<PAGE>
 



                                GRANCARE, INC. 

                                     INDEX
                                     -----

                                                                        Page No.
                                                                        --------

                         PART I - FINANCIAL INFORMATION


Item 1.   Financial Statements (Unaudited):
 
               Condensed Consolidated Balance Sheets-
               June 30, 1996 and December 31, 1995........................ 

               Condensed Consolidated Statements of Income-
               Three Months Ended June 30, 1996 and 1995 and
               Six Months Ended June 30, 1996 and 1995.................... 

               Condensed Consolidated Statements of Cash Flows-
               Six Months Ended June 30, 1996 and 1995.................... 

               Notes to Condensed Consolidated Financial Statements....... 


Item 2.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations for the
               Three and Six Months Ended June 30, 1996................... 


                          PART II - OTHER INFORMATION



Signatures    ............................................................ 
 

                                       2
<PAGE>
 
                         PART I - FINANCIAL INFORMATION



ITEM 1.   FINANCIAL STATEMENTS
          --------------------

                                 GRANCARE, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars In Thousands)
<TABLE>
<CAPTION>
                                                             June 30,    December 31,
                                                               1996          1995
                                                          ------------   ------------
                                                           (Unaudited)      (Note)
<S>                                                         <C>          <C>
ASSETS                                 
Current assets:                        
 Cash and cash equivalents..............................      $12,929        $17,738
 Accounts receivable, less allowance                    
  for doubtful accounts                                 
          (1996 - $11,260 and 1995 - $10,856)...........      214,880        173,068
 Inventories............................................       16,000         13,527
 Prepaid expenses and other current  assets.............       37,821         16,498
 Deferred income taxes..................................       10,933         10,933
                                                         ------------   ------------
                                                        
          Total current assets..........................      292,563        231,764
                                                        
Property and equipment..................................      268,501        270,042
 Less accumulated depreciation..........................      (62,393)       (55,689)
                                                         ------------   ------------
                                                              206,108        214,353
Other assets:                                           
 Investments, at fair value.............................       36,767         30,305
 Goodwill, less accumulated amortization                
          (1996 - $7,965 and 1995 -  $5,535)............      125,495        120,946
 Other intangibles, less accumulated amortization       
          (1996 - $9,451 and 1995 - $8,051).............        9,036          9,793
 Other..................................................       41,423         38,000
                                                         ------------   ------------ 
                                                        
Total assets............................................     $711,392       $645,161
                                                          ============   ============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date. See Notes to Condensed Consolidated Financial
Statements.

                                       3


<PAGE>
 
                                 GRANCARE, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars In Thousands)
<TABLE>
<CAPTION>
 
                                                                  June 30,    December 31,
                                                                    1996          1995
                                                               ------------   ------------                             
                                                                (Unaudited)      (Note)
<S>                                                              <C>          <C>
         LIABILITIES AND SHAREHOLDERS' EQUITY     
Current liabilities:                     
 Accounts payable and accrued expenses.......................       $77,841        $72,935
 Accrued wages and related liabilities.......................        23,741         24,069
 Interest payable............................................         8,226          6,793
 Income taxes payable........................................         1,396              -
 Notes payable and current maturities of long-term debt......         3,287          4,937
                                                               ------------   ------------

         Total current liabilities...........................       114,491        108,734

Long-term debt...............................................       375,212        334,668
Deferred income taxes........................................        16,616         16,735
Other........................................................        13,043         12,425

Shareholders' equity:
 Common stock; no par value; 50,000,000 shares authorized
  (shares issued:  1996-23,481,998 and  1995-23,948,728).....       125,163        134,699
 Treasury stock (1996-200,000 shares and 1995-915,000 shares)        (5,030)       (18,700)
 Equity component of minimum pension liability...............          (465)          (465)
 Unrealized gain on investments net of income taxes 
  (1996 - $3,822 and 1995 - $3,453)..........................         5,733          5,206
 Retained earnings...........................................        66,629         51,859
                                                               ------------   ------------
                                                                    192,030        172,599
                                                               ------------   ------------

Total liabilities and shareholders' equity...................      $711,392       $645,161
                                                                ============   ============
</TABLE>
Note:  The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date. See Notes to Condensed Consolidated Financial
Statements.

                                       4
<PAGE>
 
                                 GRANCARE, INC.

                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                  (Unaudited)
            (Dollars And Shares In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                          Three Months Ended    Six Months Ended
                                                                June 30,            June 30,
                                                         -------------------- -------------------
                                                             1996      1995      1996      1995
                                                         ---------- --------- --------- --------- 
<S>                                                        <C>       <C>       <C>       <C>
Revenues:                              
      Net patient revenues.............................    $245,427  $203,148  $474,254  $394,129
      Investment and other revenue.....................       1,844     1,278     3,028     1,978
                                                         ---------- --------- --------- ---------
        Net revenues...................................     247,271   204,426   477,282   396,107

Expenses:
      Operating expenses...............................     218,646   180,318   423,721   351,413
      Depreciation and amortization....................       6,514     4,959    12,672     9,676
      Interest expense and financing charges...........       8,918     6,717    17,067    12,750
                                                         ---------- --------- --------- ---------

        Total expenses.................................     234,078   191,994   453,460   373,839
                                                         ---------- --------- --------- ---------

Income before income taxes.............................      13,193    12,432    23,822    22,268
Income taxes...........................................       5,013     4,719     9,052     8,476
                                                         ---------- --------- --------- ---------

        Net income.....................................      $8,180    $7,713   $14,770   $13,792
                                                         ========== ========= ========= =========
Net income per common and common equivalent share:

        Primary........................................       $0.34     $0.32     $0.62     $0.57
                                                         ========== ========= ========= =========

        Fully diluted..................................       $0.33     $0.32     $0.61     $0.57
                                                         ========== ========= ========= =========

Weighted average number of common and common
equivalent shares outstanding:

        Primary........................................      24,077    24,252    23,932    24,188
                                                         ========== ========= ========= =========

        Fully diluted..................................      26,570    26,582    26,484    26,518
                                                         ========== ========= ========= =========

</TABLE>
See Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
 
                                 GRANCARE, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                             (Dollars In Thousands)
<TABLE>
<CAPTION>
                                                                              Six Months Ended June 30,
                                                                             --------------------------
                                                                                  1996         1995
                                                                             ------------- ------------
<S>                                                                            <C>           <C>
Operating activities                   
       Net income..........................................................       $ 14,770     $ 13,792
       Adjustments to reconcile net income to net cash
          (used in) provided by operating activities:
          Provision for doubtful accounts..................................          3,607        2,753
          Depreciation and amortization....................................         12,672        9,676
          Gain on sale of assets...........................................           (114)        (114)
          Amortization of deferred financing costs.........................            468          133
          Changes in assets and liabilities net of
               effect of acquisitions:
               Accounts receivable.........................................        (44,728)     (17,834)
               Other current assets........................................         (4,096)        (807)
               Other noncurrent assets.....................................         (3,641)      (6,945)
               Accounts payable and accrued expenses.......................          1,682        6,622
               Accrued wages and related liabilities.......................           (469)      (1,456)
               Interest payable............................................          1,433        1,223
               Income taxes payable........................................          1,928        1,834
               Other noncurrent liabilities................................             76          634
                                                                             ------------- ------------
                 Net cash (used in) provided by operating activities.......        (16,412)       9,511

Investing activities
       Acquisition of businesses...........................................         (5,929)     (54,287)
       Purchases of property and equipment.................................        (16,364)     (10,808)
       Proceeds from disposition of property and equipment.................            994        4,021
       Repayments of notes receivable......................................            ---        2,287
       Purchases of investments............................................         (5,119)      (4,083)
       Other...............................................................         (1,400)      (1,560)
                                                                             ------------- ------------
                 Net cash used in investing activities.....................        (27,818)     (64,430)

Financing activities
       Proceeds from exercise of warrants and options......................          1,992          572
       Long-term debt payments.............................................         (4,571)     (56,556)
       Proceeds from long-term debt borrowings.............................         42,250      114,650
       Payment of debt issuance costs......................................           (250)        (965)
                                                                             ------------- ------------
                 Net cash provided by financing activities.................         39,421       57,701
                                                                             ------------- ------------
       Net (decrease) increase in cash and cash equivalents................         (4,809)       2,782
       Cash and cash equivalents at beginning of period....................         17,738       28,611
                                                                             ------------- ------------
       Cash and cash equivalents at end of period..........................       $ 12,929     $ 31,393
                                                                             ============= ============
</TABLE>

See Notes to Condensed Consolidated Financial Statements

                                       6
<PAGE>
 
                                 GRANCARE, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                             (Dollars In Thousands)


SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:

     In January 1996, the Company completed the acquisition of RN Health Care
Services, Inc. ("RN Services"), a home health care business located in Detroit,
Michigan, for $2,350 in cash.  In conjunction with the acquisition, the Company
advanced $2,500 to the former owners in the form of a short-term note secured by
RN Services' accounts receivable.

     Also in the first quarter of 1996, the Company acquired a leasehold
interest in a long-term health care facility located in Naperville, Illinois,
and a hospice business located in Detroit, Michigan.

     In April 1996, the Company completed the acquisition of Jennings Visiting
Nurse Association, Inc. ("Jennings"), a home health care business based in North
Vernon, Indiana, for $937 in cash and a promissory note for $250.

     Also in the second quarter of 1996, the Company acquired a leasehold
interest in a long-term health care facility located in Summerville, South
Carolina.

     The above 1996 acquisitions had the following effect on cash:

          Fair value of assets acquired          ($7,315)
          Fair value of liabilities assumed        1,386
                                                --------
          Net effect on cash                     ($5,929)
                                                ========

     In conjunction with the sale of four long-term health care facilities
located in Michigan in the first quarter of 1996, the Company provided purchase
money financing in the amount of $17,550 evidenced by an interest-bearing
promissory note, due and payable in 1997.

See Notes to Condensed Consolidated Financial Statements.

                                       7
<PAGE>
 
                                 GRANCARE, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A - Basis of Presentation
------------------------------

          The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and Rule 10-
01 of Regulation S-X.  Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.  Operating results for the three and six month periods ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996.  For further information, refer to the
consolidated financial statements and the footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1995.
 

Note B - Change in Accounting Principle
---------------------------------------
 
          During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of.  In accordance with
Statement No. 121, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets may be less than the carrying amounts of those assets.  This new
standard had no effect on the financial statements.

Note C - Treasury Stock
-----------------------

          During the second quarter of 1996, the Company cancelled 715,000
shares of treasury stock which the Company had repurchased in July, 1995.

Note D - Contingent Earn-Out Provision
--------------------------------------

          The purchase agreement with respect to the 1994 acquisition of Long
Term Care Pharmaceutical Services Corporation I and Long Term Care
Pharmaceutical Services Corporation III (collectively, "LTC"), contains a
contingent earnout provision for the two year period ended June 30, 1996.  An
additional $5.5 million could be paid to LTC (in the form of a subordinated
promissory note) provided certain operating results were obtained for this
period.  Management has not completed its analysis of the amount payable under
this provision.

                                       8
<PAGE>


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          ---------------------------------------------------------------
          RESULTS OF OPERATIONS
          ---------------------

General

  The Company was incorporated in September 1987.  Since its inception, the
Company has grown rapidly through acquisitions of long-term care facilities and
specialty medical businesses such as institutional pharmacy operations.  In this
regard, during the last year, the Company has made two significant acquisitions.
In April 1995, the Company acquired Cornerstone Health Management Company, a
contract management firm that specializes in the implementation and management
of subacute and other specialized medical programs in acute care hospitals.  In
addition, on July 20, 1995, the Company acquired Evergreen Healthcare, Inc. by
merger in a transaction accounted for as a pooling-of-interests for financial
reporting purposes.  In addition to the above, the Company during the three
month period ended June 30, 1996 acquired Jennings Visiting Nurse Association,
Inc., a home health agency in Indiana, and leased Hallmark HealthCare Center, a
skilled nursing facility in South Carolina.  Also, on July 1, 1996, the Company
acquired Emery Pharmacy, a provider of institutional pharmacy services in
upstate New York.
 
  The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain health care costs by limiting reimbursement rates,
increasing case management review and negotiating reduced contract pricing.
Government payors, such as state-administered Medicaid programs and, to a lesser
extent, the federal Medicare program, generally provide more restricted coverage
and lower reimbursement rates than private pay sources.  For the six months
ended June 30, 1996, the percentage of the Company's net patient revenues
derived from Medicaid and Medicare programs were 38.9% and 38.4%, respectively,
of the Company's total revenues.  For the year ended December 31, 1995, the
percentage of the Company's net patient revenues derived from Medicaid and
Medicare programs were 44.7% and 30.2%, respectively, of the Company's total
revenues.

  The Company derives its revenues by providing skilled nursing, pharmacy,
therapy, subacute and other specialty medical services and contract management
of specialty medical programs for acute care hospitals. In general, the Company
generates higher revenues and profitability from the provision of specialty
medical services than from routine skilled nursing care, and the Company
believes that this trend will continue. Accordingly, the Company has in the past
sought to enhance its operating margins by increasing the proportion of its
revenues derived from specialty medical services. While the Company intends to
continue pursuing this course, the Company is also currently exploring ways to
enhance shareholder value through various strategic alternatives involving its
pharmacy operations.

Results of Operations

  The following tables set forth, as a percentage of patient revenues, certain
income data for the periods indicated:



                                       9

 
<PAGE>
 
<TABLE>
<CAPTION>
                                                      Revenue Composition
                                                 Percentage of Patient Revenues
                                        ---------------------------------------------
                                            Three Months Ended      Six Months Ended
                                                 June 30,               June 30,
                                             1996        1995       1996       1995
                                        ------------ ----------- ---------- ---------- 
<S>                                       <C>         <C>         <C>        <C>
Skilled Nursing and Subacute Care:
   Routine services....................     43.7%       53.9%      44.9%      55.2%
Specialty Medical:
   Therapy, Subacute and Home Health...     26.2%       19.5%      25.5%      18.8%
   Pharmacy (1)........................     26.6%       22.8%      26.1%      24.1%
   Contract Management (1).......... ..      3.5%        3.8%       3.5%       1.9%
                                        ------------ ----------- ---------- ----------
      Subtotal.........................     56.3%       46.1%      55.1%      44.8%
                                        ------------ ----------- ---------- ----------
      Total............................    100.0%      100.0%     100.0%     100.0%
                                        ============ =========== ========== ==========

<CAPTION> 

                                                   Revenue  Per Patient Day
                                           Derived from Skilled Nursing and Subacute
                                                             Care
                                        ---------------------------------------------
                                           Three Months Ended      Six Months Ended
                                                June 30,               June 30,
                                            1996        1995       1996       1995
                                        ------------ ----------- ---------- ----------
<S>                                       <C>         <C>         <C>        <C>
Routine skilled nursing................    $90.05      $86.62     $89.09     $86.73
Specialty medical services (2).........     61.33       34.59      57.51      32.64
                                        ------------ ----------- ---------- ----------
      Total............................   $151.38     $121.21    $146.60    $119.37
                                        ============ =========== ========== ==========  
Average occupancy rate.................      84%         86%        85%        87%
</TABLE>

(1) Before elimination of intercompany sales.
(2) Excludes revenue from patients outside GranCare facilities.

  The Company's net revenues for the three and six month periods ended June 30,
1996, were $247.3 and $477.3 million, respectively, compared to $204.4 and
$396.1 million for the same periods in 1995, a net increase of $42.9 and $81.2
million, respectively, or 21.0% and 20.5%.  For the three and six month periods,
$20.9 and $45.7 million, respectively, resulted from acquisitions and 45.2% and 
39.9%, respectively, was primarily attributable to same-store growth. These
increases were partially offset by loss of revenue from facilities divested or
to be divested. For the three and six month periods, specialty medical revenues 
increased to 56.3% compared to 46.3%, and 55.1% compared to 44.9%, respectively,
for the same periods in 1995. This was primarily the result of the growth in the
number of Medicare residents which utilize higher margin ancillary services 
(physical, respiratory, occupational and speech therapy).

  Operating expenses for the three and six month periods ended June 30, 1996,
were $218.6 and $423.7 million, respectively, compared to $180.3 and $351.4
million for the same periods in 1995, a net increase of $38.3 and $72.3 million,
respectively, or 21.2% and 20.6%.  For the three and six month periods, $19.1
and $40.7 million, respectively, resulted from acquisitions and 44.3% and 38.9%,
respectively, was primarily attributable to same-store growth increases in
expenses. Specialty medical revenues generate additional costs from the higher 
staffing levels required to care for the higher acuity Medicare residents. The 
additional ancillary services (physical, respiratory, occupational and speech 
therapy) utilized generate additional costs in line with the growth realized in 
the specialty medical revenues.

  Depreciation and amortization expenses for the three and six month periods
ended June 30, 1996, were $6.5 and $12.7 million, respectively, compared to $5.0
and $9.7 million for the same periods in 1995, an increase of $1.5 and $3.0
million, respectively, or 30.0% and 30.9%.  This increase was primarily the
result of depreciation and amortization expenses attributable to businesses
acquired and additions to property and equipment.

  Interest expense and financing charges for the three and six-month periods
ended June 30, 1996, were $8.9 and $17.1 million, respectively, compared to $6.7
and $12.8 million for the same periods in 1995, an increase of $2.2 and $4.3
million, respectively, or 32.8% and 33.6%.  These increases were primarily due
to interest on additional indebtedness incurred in connection with acquisitions,
the issuance of $100 million of Senior Subordinated Notes and to a lesser
extent, borrowings to fund working capital.
 
  Income taxes for the three and six month periods ended June 30, 1996, were
$5.0 million and $9.1 million, respectively, compared to $4.7 and $8.5 million
for the same periods in 1995, an increase of $0.3 million and $0.6 million,
respectively.

                                       10

<PAGE>
 
 
  As a result of the foregoing, net income for the three and six month periods
ended June 30, 1996, was $8.2 and  $14.8 million, respectively, compared to $7.7
and $13.8 million for the same periods in 1995, an increase of  $0.5 and $1.0
million, respectively.

  During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of.  In accordance with
Statement No. 121, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets may be less than the carrying amounts of those assets.  This new standard
had no effect on the financial statements.

Liquidity and Capital Resources

  The Company's primary source of liquidity at June 30, 1996, was $12.9 million
in cash and cash equivalents compared to $17.7 million at December 31, 1995, a
decrease of $4.8 million.  The decrease in cash and cash equivalents was due
primarily to cash utilized by operations for the six month period ended June 30,
1996. Payments received by the Company from the Medicaid and Medicare programs
are the Company's largest source of cash from operations.

  Accounts receivable at June 30, 1996, were $214.9 million compared to $173.1
million at December 31, 1995, an increase of $41.8 million.  The Company's
accounts receivable includes receivables from third-party reimbursement
programs, primarily Medicaid and Medicare settlements.  The Company receives
payment for skilled nursing services based on rates set by individual state
Medicaid programs.  Although payment cycles for these programs vary, payments
generally are made within 30 to 60 days of services provided, except in Illinois
where the Medicaid program delays payments for 120 days.  The federal Medicare
program, a cost-reimbursement system, pays interim rates, based on estimated
costs of services, on a 30 to 45 day basis.  Final cost settlements, based on
the difference between audited costs and interim rates, are paid following final
cost report audits by Medicare fiscal intermediaries.  Because of the cost
report and audit process, final settlement may not occur until up to 24 months
after services are provided.  Specialty medical services provided to third
parties are billed on terms negotiated with individual customers, which often
are tied to their reimbursement cycles.  If the expansion of specialty medical
revenues continues at historic rates or if the Company is successful in
expanding its specialty medical  programs in the Evergreen facilities, average
days receivable likely will equal or exceed current levels and may require
additional working capital.

  While federal regulations do not provide states with grounds to curtail
payments under their Medicaid reimbursement programs due to state budget
deficiencies or delays in enactment of new budgets, states have nevertheless
curtailed payments in such circumstances in the past.  In particular, some
states have delayed the payment of significant amounts owed to health care
providers such as the Company for health care services provided under their
respective Medicaid programs.

  In addition to principal and interest payments on its long-term indebtedness,
the Company has significant rent obligations relating to its leased facilities
as well as property expenses (principally property taxes and insurance) relating
to all of its facilities.  The Company's anticipated principal payments, cash
interest payments, rent and property expense obligations for 1996 are estimated
at $100.0 million.

  The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate the
addition of specialty medical services, and to improve the physical appearance
of its facilities for 

                                      11

<PAGE>
 
 
marketing purposes. Total capital expenditures for the six month period ended
June 30, 1996, were $16.4 million. The Company estimates that capital
expenditures for the year ending December 31, 1996, will be approximately $32.0
million.
 
  The Company maintains a $150.0 million credit facility with First Union
National Bank of North Carolina ("First Union") and a syndicate of banks which
may be used for working capital, other general corporate purposes and
acquisitions (the "Credit Facility").  As of June 30, 1996, approximately $80.0
million was outstanding under the Credit Facility.  The Company will be able to
borrow under the Credit Facility through June 1998, at which time it will
convert to a term loan unless it is refinanced or extended.  Upon conversion,
the amount then outstanding will be payable in equal quarterly installments
through June 2002.

  On August 5, 1996, the Company sold its entire interest in Alternative Living
Services, Inc., resulting in net proceeds to the Company of approximately $23.0
million. The Company intends to use the proceeds from this sale primarily to
repay amounts outstanding under its Credit Facility and, to a lesser extent,
fund working capital requirements (See Item 5).

  The Company believes that its cash from operations, existing working capital
and available borrowings under the Credit Facility will be sufficient to fund
the fixed obligations, capital expenditures and other obligations referred to
above, as well as to repay certain indebtedness when due, and further expand the
Company's business.  However, in the event that the Company continues to grow
through acquisitions, the Company may need to raise additional capital, either
through borrowings (including an increase in the Credit Facility), sale-
leaseback financings, or the sale of debt or equity securities to finance the
acquisition price and any additional working capital and capital expenditure
requirements related to such acquisitions.  In this regard, the Company has
recently had discussions with First Union and certain other lenders regarding
obtaining additional financing in connection with future transactions.  Based on
these discussions, at this time the Company believes that any additional
required financing could be obtained at market rates on terms that are
acceptable to the Company, although no assurance can be given regarding the
terms or availability of additional financing in the future.

  The Company is a beneficial owner of 1,000,000 shares of stock of Health and
Retirement Properties Trust ("HRPT") which are held in trust and pledged as
collateral for the obligations of two of the Company's subsidiaries under
mortgage notes and lease obligations with HRPT.  The pledge agreement strictly
limits GranCare's ability to sell the shares until its obligations to HRPT are
satisfied, which will not be until the year 2010.  As a result, these shares
cannot be sold to meet other financial obligations.  In addition, such mortgage
notes and lease obligations contain provisions that restrict, upon the
occurrence of an event of default thereunder, the ability of such subsidiaries
to make dividends, loans or advances to the Company.  In accordance with FASB
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the HRPT stock is carried at fair market value, with unrealized
gains and losses reported as separate components of equity.  The Credit Facility
and indenture pursuant to which the Notes were issued also contain restrictions
on the ability of the Company to pay dividends to its shareholders upon the
failure to satisfy certain financial covenants.

  The Company maintains a captive insurance subsidiary to provide for its
obligations under workers compensation and general and professional liability
plans.  These obligations are funded with long-term fixed income investments
which are not available to satisfy other obligations of the Company.

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<PAGE>
 

                          PART II - OTHER INFORMATION



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<PAGE>
 
                                  SIGNATURES


  Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date:  December __, 1996      GRANCARE, INC.



                            /s/ Jerry A. Schneider
                            ----------------------
                            Jerry A. Schneider
                            Executive Vice President and Chief Financial Officer
                            (Duly Authorized Officer and Principal Financial
                            and Accounting  Officer)


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